Darden Restaurants: How Much More Upside is Left?

© Reuters. Darden Restaurants: How Much More Upside is Left?

Darden Restaurants (NYSE:DRI), the operator of several full-service restaurant brands, was hit hard by the spread of the COVID-19 pandemic, and the shelter-at-home policies pursued by different states.

It quickly recovered as the economy opened up, delivering a 51% total sales growth in the first quarter of the 2022 fiscal year, and 47.5% same-store sales growth. I am bullish on the stock.

Wall Street has anticipated the company's speedy comeback, sending its shares to a new high in recent months.

How much upside is left? About 11.5%, according to 20 Wall Street analysts who followed its shares in the past three months.

They have an average price target of $171.29, with a high forecast of $185, and a low forecast of $155.

TipRanks assigns the company a Smart Score of 9 out of 10, citing strong fundamentals and technicals, and increased hedge fund activity.

Still, predicting where the stock is heading over the next 12 months is a tricky task, as the company faces both headwinds and tailwinds.

Headwinds, Tailwinds

As is the case with businesses across America, Darden faces the headwinds of rising food and energy prices, and labor shortages, raising its operating costs. 

At the same time, Darden is facing the tailwinds of the opening up of the American economy, and the rising vaccination rates that make people more comfortable dining out.

Also, it's facing the tailwind of the high savings rate among American households accumulated during the pandemic. Some of these savings will end up being spent on dining out.

Thus far, many businesses, including restaurants, have managed to use these tailwinds to raise their prices and pass the higher costs associated with the headwinds on to consumers.

Dining out is a discretionary activity though, meaning that full-service restaurants must find other ways to maintain their profitability. They must capitalize on their competitive advantages, and Darden has many.

Multiple Advantages

Darden Restaurants is a collection of 1,834 full-service brand name restaurants in the U.S. and Canada: 875 under Olive Garden; 533 under LongHorn Steakhouse name; 170 under Cheddar's Scratch Kitchen; 81 under Yard House; 63 under The Capital Grille, 44 under the Seasons 52; 26 under Eddie V's Prime Seafood brands; and 42 under Bahama Breeze.

Managing many restaurants under different brands allows Darden to achieve economies of scale that cut costs, and raise profitability. The opening up of new stores (35 to 40 in fiscal 2022), allows the company to grow its sales.

Bottom Line 

Darden Restaurants is well-positioned to ride the re-opening of the U.S. economy, and deliver superior returns to its stockholders.

Disclosure: At the time of publication, Panos Mourdoukoutas no position in Darden Restaurants

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